ANZ, the nation's third largest lender, has slashed variable rates on its "no frills" home loan by 34 basis points to 3.65 per cent in the latest move by a big lender to stimulate flagging demand and build market share.

The move has surprised a market expecting rate increases following the rise in wholesale funding costs, greater regulatory expenses and the likelihood of higher cash rates.

ANZ's move is further evidence of banks jostling for market share, especially for lower risk borrowers.

The bank's new headline rate for its "Simplicity Plus" home loan makes it the most competitive among the big four for variable principal and interest loans for owner-occupiers with a 20 per cent deposit, according to RateCity, which compares product prices.

It is being introduced at a time when lenders are under intense pressure from prudential regulators and the banking royal commission to scrutinise borrowers' capacity to repay loans.

This has resulted in forensic analyses of borrowers' total income and expenses.

Race for new customers

ANZ borrowers with less than 20 per cent deposit will pay the old rate of 3.99 per cent.

Sally Tindall, research director at RateCity, said: "It shows the bank is competing hard to get new customers as non-banks threaten their market share. It's a huge move."

There's a possibility other lenders will try to protect – or increase – their residential lending market share through new offers.

Residential loans typically comprise about 55 per cent of Australian bank loans, about 25 per cent of group revenues and 30 per cent of cash earnings, according to investment bank Morgan Stanley.

House prices continue to slide, particularly in Melbourne and Sydney, auction clearance rates are falling and market sentiment is weakening, according to analysis by CoreLogic, which monitors prices.

ANZ is also reducing its popular two and three-year fixed rates by between 10 and 24 basis points for principal and interest investors and owner-occupied borrowers.

Popular segment

Earlier this week, Commonwealth Bank, the country's largest mortgage lender, cut lending rates on popular fixed interest products for home buyers and investors by 10 basis points.

The bank is also refocusing its marketing on the most popular segment of the lending market with cuts to a range of products that target high quality borrowers. The latest cuts do not include owner-occupier, interest-only borrowers.

CBA has lowered interest rates on two and three-year fixed rate, owner-occupier principal and interest loans to 3.79 per cent and 3.89 per cent respectively.

Three-year fixed rate investment home loans have been cut to 4.10 per cent.